An Unconventional Guide to Paying for College

President Obama’s Student Loan Debt Plan is Worthless

president obama student loans

Last week, President Obama unveiled a new plan to help combat the rapidly growing amounts of student loan debt in our country. He made his speech in front of a group of 4,000 protesters, mainly students, who had gathered as part of the “occupy” protests springing up around the country.

I won’t get into a political debate here at all, but I do want to point out what I believe are significant flaws in the President’s proposed student loan debt plan. If you are a student, or anyone else who is repaying student loans, then this is important information that could directly affect your financial future.

Student Loan Proposal #1

Last year Congress passed a law that would allow a borrower on the Income Based Repayment Plan to cap their maximum student loan payment at 10% of their discretionary income, rather than the 15% it had been previously. This law had been scheduled to take effect in 2014, and the President’s new proposal will simply speed that process up. My problem with this proposal is that it is not actually helping students pay off their loans any faster. Lowering the maximum required payment? All that does is drag out the length of repayment, and increase the amount of interest that is being paid on a student loan.

Student Loan Proposal #2

Under the Income Based Repayment Plan the Department of Education will allow the remaining debt to be forgiven after 20 years instead of 25 years. This sounds like a great benefit, but does anyone really want to pay on their student loan for 20 years? Or even 15 years? I think that we need to stop treating student loan debt like mortgages (although I will concede that some people have as much student loan debt as the average mortgage amount, or more…). We should look to cap the maximum repayment period at 10 years. This will force students to deal with their student loan problems quickly, rather than stringing it out until their kids are ready to go off to college, and they are still paying on their own student loans!

Student Loan Proposal #3

The President’s new student loan debt plan will also allow borrowers who have a student loan under the Federal Family Education Loan Program (which was disbanded in 2010) and a loan under the currently mandatory Federal Direct Loan program, to be able to consolidate these loans for up to one half percentage point less in interest rate.

I actually think that this is a good proposal because it will go a long ways towards preventing default and confusion among student borrowers. It is much more difficult to manage 2, 3, or 4 different student loan payments than it is to manage one payment. This proposal allows you to streamline your monthly payments, and even get a small reduction in your student loan interest rate.

However, the problem lies in the fact that when you consolidate these loans, you almost always lose your student loan deferment and forbearance privileges. That is how the policy currently works, and I have not read anywhere where this is proposed to change. This means that if you consolidate these loans into one Direct Loan, then you will not be eligible to apply for a medical deferment, or a forbearance due to a financial hardship or loss of employment.

Consolidating your loans may sound like the smart move to make, but be sure you read all of the red tape before signing the loan consolidation papers. You may be signing some very important rights away.

What Needs to Happen

I don’t have to answer for fixing the student loan program. Unfortunately, I don’t know the one trick that will help borrowers repay their loans easier (except for 0% interest on student loans of course).

What needs to happen is a more focused effort by the Federal Government and all colleges around the nation in helping students avoid taking out student loans in the first place! Students will always have a difficulty repaying a debt. We cannot change that, but what we can change is the amount of debt they have to repay in the first place.

We need to implement financial literacy programs that teach students basic money management principles and teach them how to budget their money while in college, and once they graduate. Colleges need to put more emphasis on the entrance loan counseling that is required before loan disbursement. This is the perfect time to explain to your student borrowers exactly what they can expect when they repay their loans. There is a large chunk of time between entrance counseling when a student is a freshman, and exit counseling when they have already racked up over $100,000 in student loans. We need to be proactive in this middle period. I would advocate annual required loan counseling sessions.

I would also strongly advocate for more conscious effort on promoting scholarships and grants. We need to help our students find the “free money” that is available to them, rather than relying so heavily on student loans. If we don’t, then we may begin to lose students in the future who simply decide not to take out so much in student loans.

Do you have any ideas on what can be done to combat the rising student loan debt problem?

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4 Comments

  1. I agree that proposal #1 is worthless – instead of reducing the loan, it’s really increasing the loan once you add in interest over time. However, proposal #2 is a little better. Of course, it’s best to get those loans paid off sooner than later, but taking 5 years off the balance counts for something.
    Little House recently posted..Thanks Lahore, Pakistan!My Profile

    • @Little House — You are definitely right that reducing the term would be a good thing. I guess my main thought was that these proposals really don’t add up to a whole lot in the long run. 5 years off a student loan would be a great benefit, but you still have 20 years to pay on one!

      I wish the proposal made much more sweeping changes and recommendations.
      STRONGside recently posted..President Obama’s Student Loan Debt Plan is WorthlessMy Profile

  2. Thanks for breaking this down. I’m fortunate in that I graduated from college and grad school without any loans but as a result, I’ve turned a blind eye to the problems with student loans.

    That said, I agree with you that a big solution to the problem is working with the students about money management including the entrance counseling. If they know a bit more about what they’re getting into, maybe they’d be more careful.

    • @Jana — I would love to come up with an idea about better ways to communicate and educate student borrowers. Maybe us as a PF blogger community can start a coalition to help educate our next generation on student loans!

      Thanks for stopping by!
      MoneyforCollegePro recently posted..Can You Invest Student Loans? Follow UpMy Profile

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